Brent Oil Market Will Be More Stable As Supply And Demand Are Near Equilibrium

Demand for crude oil isn’t likely to grow much this year, just 0.9%, which means that simply maintaining 2012 levels of production will be enough to keep the market in balance, and the price of oil stable. It’s more likely that demand will exceed supply, but only slightly. Any growth in supply will mostly likely be due to an increase in production in the U.S. and Canada, according to the report. Demand from OECD countries will likely decline, though it will be offset by accelerating demand from China and India.

Source: Morgan Stanley

Natural Gas Will Remain Weak Due To Resilient Supply And High Inventory

A relatively mild winter which resulted in reduced demands has increased the gas inventories. Prices will remain depressed through the first half of 2013, until inventories remain elevated. But later in the year, prices should improve a bit as consumer switch from coal to gas due to initially lower prices. Supply growth will remain resilient.

Source: Morgan Stanley

Aluminium Will Remain Depressed, Thanks To Huge Global Stores Of The Metal

High global stores of the metal combined with high production capacity means that aluminium prices will likely remain depressed. Aluminium demand should benefit from any further infrastructure and construction related stimulus from China—and economists expect that it is the 6%-7% increase in demand from that region that will stabilize aluminium prices.

Source: Morgan Stanley

Solid Fundamentals Mean The Market For Copper Will Remain Healthy

Supply growth will remain constrained over the next five years. And while the demand for the metal in China has been contracting in the past, this will likely reverse as China’s power infrastructure and auto market are stabilizing. Copper has superior fundamentals, and long term, investors expect it to outperform other London Metal Exchange metals.

Zinc Supply Is Finally Tapering, But It’s Still Much Higher Than Demand

In 2012, the supply of zinc declined faster than consumption, thanks to a sharp drop in production in China. This an encouraging trend, as the metal has been in over supply since the financial crisis. Any Chinese policy moves towards infrastructure growth would also boost the price of zinc.

Source: Morgan Stanley

Thanks To Easy Money In The U.S. And Europe, Gold Is Still The Best Bet

The third round of quantitative easing from the Fed, combined with the ECB’s unlimited bond purchase program has been good for gold prices, reinforcing Morgan Stanley’s long-held bullish view on the metal. However, the demand for gold is unusually low, with 2012 gold sales at their lowest level in all three years of the current Central Bank Gold Agreement. This lowered demand will likely temper prices.

Source: Morgan Stanley

Silver Will Probably Outperform Gold But It’s More Volatile

Silver could outperform gold on a relative price basis, as it has a cheaper entry point. While silver had been underperforming as investors steered to gold thanks to uncertainty over global macroeconomic policy, it started to rally when speculation over QE 3 emerged in September. This is a trend that will likely continue, as supply and demand fundamentals remain favorable. Production from mines has stalled since 2011, whereas demand for silver for electronics and jewelry is making up for the collapse in its use in photographic equipment, coins and medals.

China Has Half The World’s Cotton Under Lockdown, Which Could Make It More Expensive

With China purchasing more and more cotton to add to their reserves, it is likely that at least half the global stocks of the fiber will be locked up there. And since current economics are favoring grain crops, cotton supplies might fall slightly as cotton acreage contracts by 4%. Morgan Stanley remains bullish on cotton, unless a global GDP slowdown lowers demand.

Source: Morgan Stanley

There Is A Sugar Surplus In The World, And It’s Probably Going To Stay That Way

A global surplus of sugar, thanks to larger-than-expected production in Brazil and healthy production in India, will likely cause prices to remain depressed for a while. Longer term, prices will need to be high enough to provide farmers with enough incentive to continue to plant sugar. However, that incentive price is well below current levels.

Source: Morgan Stanley

Corn Hasn’t Been Properly Rationed In The U.S., Which Could Lead To Short Term Volatility

Global stores of corn remain precariously low, and U.S. demand has not been adequately rationed, which is why Morgan Stanley is bullish on corn for the short term. However, assuming normal weather and increased production in Brazil will likely cause prices to fall into 2014.

Source: Morgan Stanley

Soybean Prices Remain Elevated Due To Supply Disruptions In South America

Strong U.S. demand and recent supply shortages in South America will cause Soybean prices to remain elevated and volatile. High prices will encourage production and stabilize supply, which will likely cause prices to fall slightly and then stabilize.

Source: Morgan Stanley

Demand For Wheat Will Fall Because It Will Be More Expensive Than Corn

Wheat prices will remain sensitive to possible supply challenges in the U.S., but the fact that it’s more expensive that corn will likely temper demand. U.S. exports should rise as Ukrainian and Russian wheat production will likely be disappointing. The drought in Australia and flooding in Argentina will also likely put a dent in the quality and quantity of wheat produced in those regions.